Raise your hand if you remember the Stinger missile. Keep your hands raised if the reason you remember that the Stinger comes from reading newspapers during the Reagan administration and think of it as the missiles the mujahideen used to shoot down Soviet helicopters in Afghanistan.
Yeah. That’s what I thought. But here’s something that might surprise you: 35 years after the Soviets withdrew from Afghanistan, the Stinger is making a comeback. And Raytheon is about to start making money selling Stinger missiles again.
From Afghanistan to Ukraine
This isn’t exactly a new story. Since the USSR, renamed Vladimir Putin’s Russian Federation, invaded Ukraine in 2022, the NATO military has taken the Stingers out of storage, dusted them off and sent them to Ukraine. To date, some 2,000 Stingers have been donated to aid in the defense of Ukraine.
But as the war drags on and supplies run out, the US Pentagon believes the time has come to restart production of the Stinger, not only for Ukraine, but also for itself and its allies. In December, the US Defense and Security Cooperation Agency – DSCA, the arm of the Pentagon that coordinates foreign military sales – informed Congress that the US State Department had approved a request from the Germany, Italy and the Netherlands aim to purchase 940 new Stinger missiles. Assuming Congress approves the sale, RTX Company (NYSE:RTX) – as Raytheon was recently renamed – is expected to reap hundreds of millions of dollars in revenue from the sale.
Restart the Stinger
RTX hasn’t built new Stingers in 20 years. But as Defense One reported in June, after the war in Ukraine began, the Pentagon asked it to restart production, ordering the production of 1,700 modernized missiles by 2026.
The new missiles will be upgraded FIM-92 “K” Stingers, nine generations of missiles removed from missiles used in the Soviet-Afghan war. Equipped with new proximity fuzes, the new Stingers will be able to take on 21st century threats that didn’t exist 40 years ago, particularly small unmanned aerial vehicles (UAVs) too small to “strike.”
They will also be configured to fire from military vehicles, such as Humvees, and receive targeting data from their launchers en route. This is a crucial upgrade for tracking drones that emit little or no heat signature and might not be detectable by “original recipe” Stingers, which were heat seekers.
Who will build the Stingers?
This is where things get interesting (for investors). RTX is historically the approved manufacturer of the Stinger missile. But late last year, the US military awarded contracts to both RTX And its rival in missile systems, defense contract giant Lockheed Martin (NYSE:LMT)to develop an improved Stinger missile.
In September last year, RTX and Lockheed won contracts for “upgrade and replacement” of the Stinger: $418.3 million for Raytheon and $312 million for Lockheed Martin ($730.3 million). dollars in total). However, these contracts do not appear to be linked (at least not directly) to the sale of which the DSCA informed Congress in December, and which represents a total amount of $780 million. What else, Aviation Week confirms total number of upgraded Stingers the Pentagon wants to buy could be as high as 8,000 — 8 1/2 times as much as described in the NATO sale.
On the one hand, this is probably something of a disappointment for investors in RTX. The company does not win the Stinger contract alone, but must share the sale with Lockheed. On the other hand, in light of the September 2023 contract, it appears that Stinger’s eventual earnings could be greater for both RTX And Lockheed – up to 8.5 times larger.
How profitable is this for Raytheon?
Let’s not count the 8,000 of these “chickens” before the eggs hatch. But even the $1.51 billion in contracts already awarded are quite significant. Assuming the same approximate 57-43 split in contract value seen in September contracts, a total of $1.51 billion in contracts should mean at least $865 million in additional revenue for RTX.
Will this be enough to move the needle on this? defense equipment?
Raytheon Missiles & Defense, the RTX unit through which Stinger sales will be made, is the company’s second-smallest business unit, with annual revenue of $14.9 billion. However, it is also RTX’s second the biggest profit contributor, generating $1.5 billion in operating profits, according to data from S&P Global Market Intelligence.
So $865 million in sales at Raytheon Missiles & Defense, with an average profit margin of 10.2%, should mean about $88 million in additional profits for RTX, or about $0.06 more per share, or approximately 3% of the company’s average annual profits. Spread that out over three years between now and 2026, and it could be enough to boost Raytheon’s annual profit growth rate from the currently expected 11% to perhaps 12%.
It’s not a huge amount, of course. But I think it’s big enough to shake things up on RTX stock. And if RTX receives an order for 8,000 more missiles, you can expect that needle to go even higher.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.
Why is Europe buying 940 new Stinger missiles from Raytheon? was originally published by The Motley Fool
